oc | Sunday 26th January

Understanding Market Value is Important

Last week we pointed out that valuing a home is a bit like different vegetable soup recipes. Everybody has a different way of doing it. However, in the end the most important opinion of is yours.

But that doesn’t mean you should ignore what the rest of the market (the majority of other informed ) thinks the home you are after is worth. mv

Because while your opinion on value is the most important, it is possible to pay too much for a . You can pay more than you needed to win the home and/or more than the market thought was reasonable.

When buying a home, most of us are looking at maximising our financial and emotional outcomes on the purchase. Correctly understanding the market value can help you do this because if you pay more for the home than the market thinks reasonable you are affecting four key elements relating to the financial and emotional outcomes of your purchase.

Let’s take a situation where you buy a home after it has been passed-in, or sold through a private sale or an Expression of Interest campaign. You really want this home and end up paying $3,300,000 for it, taking no notice of the fact that no-one else has been prepared to pay more than $2,800,000 for the property.

The first key element your decision will affect is .  Let’s say in five years time you sell the home for $5,000,000, making your capital growth over that time just 52%. However, if you’d paid the market value for the property, your capital growth would have been more like 79%. Taking that one step further, if you’d managed to buy the property really well, at say $2,500,000, your capital growth would have been 100%.  What that means is that, in the long term, if you buy two or three homes well compared to market valuation, in effect what you get is a free home.

Paying too much for your property will also affect the second key element Cashflow. By paying $3,300,000 instead of $2,800,000 you’ve got an extra mortgage of $500,000 to service. That’s an extra $3000 in monthly mortgage repayments (presuming interest rates don’t go up too much), or $36,000 a year, an amount that could have gone a long way to paying the family’s school fees.

Then there’s the third key element of Risk. Should your life not turn out as planned, which is what risk is all about, paying significantly over the odds greatly increases your financial risks in market downturns, job displacement, family crises and so on. Why? Because you simply have less discretionary money to ride through the tougher than expected times.

Finally we come to the fourth key element, the Emotional Outcome. The fact is that none of us like to find that we have paid too much for something (without realising). The homebuying experience sours and the joy of the floorplan quickly dissipates when you figure out you have paid $500,000 more than you really needed to.

So who is to blame if you pay too much? You may be inclined to blame the selling agent, but if you as a homebuyer end up paying more than you need to because you don’t do the necessary research or find a professional to do it for you, you can’t blame the selling agent for rubbing his hands in glee – after all his job is to get the best price he or she can for the vendor.

Remember then, that while your opinion of value is the most important it needs to be well researched. And part of that research is understanding what the market really thinks.

Printed each week in The – Melbourne’s Million Dollar Plus Magazine

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